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The ONS revised again. It always does, but it can be hard to keep up. You may recall, back at the end of 2011 the UK fell back into recession, suffering what we called a double dip — except it didn’t. Subsequent revisions of the ONS data on GDP revised the contraction away. You may also recall that the UK grew by 0.6 per cent in Q2 of this year, which was good, but working against this was that much of the growth came on the back of rising consumption, or falling savings. Given the high level of UK household debt, some might say that this development was a tad worrying — except that they didn’t. The data has been revised, and this time the story revealed is much more encouraging.

The first revision was to the headline figure. The ONS is now saying the UK economy expanded by 0.7 per cent in Q2. To put that in context, the US expanded by 0.4 per cent and the Eurozone by 0.3 per cent in the quarter. On an annual basis the economy expanded by 1.5 per cent.

Drill down, however, and the data looks more encouraging still.

It turns out – or at least this is what the latest data says – that investment jumped by 1.7 per cent quarter on quarter and net trade rose by 0.3 per cent. Okay, the poor old indebted consumer spent more too, largely by adding to his and her debt. Consumer spending was up 0.4 per cent – boosting retail sales in the process, but then again, it is all the more encouraging that at a time of growing consumer spending, net trade provided a positive contribution to growth.

As another story today shows that there has been a gradual rise in the UK’s export sector at a time when global trade is seeing only modest growth and this provides reason to hope that this time the UK recovery is for real. See: The UK’s export-led recovery

Drill down further still in the UK GDP data, and it emerges that both manufacturing and construction grew faster than services – or to remind you of the caveat, so says the latest data, which may get changed again.

Vicky Redwood, chief UK economist at Capital Economics, said: “Looking ahead, the economy still faces some serious constraints (including the fiscal squeeze and weak bank lending), so it may struggle to keep growing at quite such robust rates.”

It is not hard to be cynical about the data. Sure, manufacturing and construction are growing, but from very low levels. Considering where we are in the economic cycle, a growth rate of 0.7 per cent is pretty modest, and there are reasons to think growth will slow later in the year.

The point is, however, that the UK does appear to be recovering. The recovery is slower than we might like and there are reasons for caution, but compared to what we have seen over the last half a decade, the growth rate is pretty good. Relative to what we are used to, the UK is booming. In China, growth is around three times faster, but relative to what China is used to, it feels like a crisis. This time, unlike in 2010, the recovery does fell a little more real.

Let us finish on a qualified positive note. Other recent data from the ONS reveals that UK total net worth at the end of 2012 was estimated at £7.3 trillion; this was equivalent to approximately £114,000 per head of population or £275,000 per household. The estimated increase in UK net worth between 2011 and 2012 was £74 billion. Okay, the increase in wealth was largely down to rising house prices and equity values and they can fall as well as rise. The jump in asset values goes some way to justify rising consumer spending.

One question remains, however. How sustainable are rises in consumption at a time of high household debt on the back of rising house prices, at a time when they already seem too high?

There is good and bad side to a currency falling in value. A cheaper currency is bad news for importers. It is bad news for consumers who want to pay as little as possible for the goods they buy, and for their holidays abroad. A falling currency can be bad news for inflation. But there is a flipside. It can at least hand exporters a massive terms of trade advantage. A country that needs to see exporters drive growth surely needs a cheaper currency. So why is it that the UK seems to have the bad side, but very little of the good side? A new report seems to provide an answer.

Between Q3 2007 and Q1 2009 the effective exchange rate of the pound fell 25 per cent. Inflation rose. Wage inflation didn’t, which left workers worse off. But the UK’s balance of trade in goods and services was largely unchanged. Why didn’t exports rise?

The Office of National Statistics has come up with four possible explanations.

Number one: Global supply chains. The argument runs like this: global trade has become so integrated, with supply chains being so closely in alignment, that it is very hard for a country that sits in a supply chain to suddenly start selling more goods just because prices have fallen. The ONS put it this way: “If multinational companies have an international supply chain structure, which involves moving goods and services between a number of countries before a final product is produced, it is difficult to change this structure in the short term in response to an exchange rate movement.”

Number two: Financial shock and composition of trade. This is a nice simple argument. The UK relies on financial services. In the aftermath of the 2008 crisis, financial services took the biggest hit, therefore UK imports were adversely affected.

Number three: Price effects. The ONS put it this way: “Domestic exporters – whose goods are relatively less expensive as a result of the depreciation – may choose to increase profit margins on sales to overseas customers, rather than passing on the full benefits of the exchange rate change.” There was another factor: oil. As the pound fell, the price of oil hit UK exporters.

Number four: Effect of downturn on main trading partners. This was surely the main problem for the UK. Sure, the pound was cheap, but our main trading partners – the US and the Eurozone – were in recession or even depression for many of the last few years.

So what can we take from all this, and say about what will happen to the UK next?

It does seem that the main reason why the falling pound did not lead to rising exports was short term in nature. The UK is slowly exporting more outside the Eurozone, but our exports to say the BRICS, were so tiny that it has taken time for the rise in exports to become noticeable. But the fact is that for the last couple of years export growth to China, for example, has exceeded import growth.

Ditto regarding integration within the supply chain. If it is the case that multinationals find it difficult to change their supply chain structure in the short term, this does not mean they cannot change it in the long term. The real hope, however, lies with re-shoring. If it really is the case that companies are beginning to return their manufacturing closer to where their customers are, that will lead to a slow, bit by bit improvement.

In other words, a cheap pound has not benefited UK exporters that much up to now. But that does not mean it won’t do so over the next few years

It happened in 1997, and some think it is happening again. Back in 1994 the US Federal Reserve upped interest rates, and so begun a cycle of tightening monetary policy. Money flowed from East to West, and in 1997 crisis was the watch word. The so called tiger economies of South East Asia in particular saw their economies look distinctly like a certain fruit – a pear. It was an important episode. Some say that the Asian crisis of 1997 sparked off a chain of events that led to the 2008 finance crisis. And now it seems to be happening all over again. Or is it?

Many economists say that the tragedy of the Asian crisis was that it was not the fault of the countries that were the victims. Cheap interest rates in the US meant money flowed from the US and Europe into South East Asia. Not all governments in the region wanted it. But – or so Nobel Laureate Joseph Stiglitz, who was chief economist at the World Bank at the time alleges – the IMF urged governments to welcome the influx of money. It is just that when money flows fast, not all of it is used wisely. Bubbles are born. Then in 1994 things began to change. Slowly the Fed increased rates. By 1997, the interest rates in the US were attractive to investors, and money flowed back. Bad Asian businesses were exposed. Good businesses were caught out too. The IMF came riding in to the rescue, but not all agreed with how it reacted. Critics say the IMF was more concerned about finding ways to ensure the West got its money back than helping the countries of South East Asia cope with the crisis.

And in so doing seeds were sown. Many countries in South East said never again, and vowed to ensure they were never again reliant on overseas capital. China watched events with alarm, and its policy of keeping a cheap yuan, and pushing for growth off a trade surplus was born. Many economists say this policy helped to contribute to global imbalances, which may have been an underlying cause of the 2008 crisis.

But by trying so hard to save the West, the IMF and –what Stligtz calls the Washington Consensus – western banks got off lightly, It happened again in 1998 with the Russian crisis and the collapse of LTCM, for which Fed Chairman Alan Greenspan managed to orchestrate a rescue which avoided a western banking crisis. But the rescue meant moral hazard because western banks did not learn their lesson. They repeated their errors until they became too big for even the Fed to sort them out in 2008.

Now let’s come up to date. We appear to be entering a new period of rising interest rates. The Fed and Bank of England have tried to persuade us that rates will not rise for some time, but the markets are not buying it. Every piece of good news, every

piece of okay news on jobs in the UK and the US, makes the markets more certain that rates will be rising sooner rather than later. On the back of this, yields on US government bonds have hit two year highs. It is not so much that money is flowing from Asia back into the US, but that the markets fear this will happen. And the fear is having an effect. The Indian Rupee fell to all-time low against the dollar yesterday (19 August). But emerging market currencies saw sharp falls across the board.

So far this year has been disastrous for the South African Rand, the Brazilian Real, and now the Indian Rupee. Last week data revealed that Russia is in recession. Yesterday data emerged indicating that Thailand is in recession. The Indonesian stock market saw sharp falls as markets took fright over the size of its current account deficit. Indonesian government debt is rising too. Yet there are reasons to think that some of these countries are being wrongly punished by the markets, and the ultimate loser will be the markets themselves.

This time around many of the larger countries of South East Asia are far less reliant on overseas money. Savings ratios are high.

In Indonesia the ratio of credit to GDP is 30 per cent, against an average of nearer 100 per cent for the region. More interestingly, in Indonesia a smaller proportion of credit has funded projects in the property sector, relative to Hong Kong and Vietnam, for example. As a result there is little hint of a property bubble in the making. Instead, much of the credit has funded infrastructure and manufacturing. In 1997 around 50 per cent of Indonesia’s credit was funded by foreign currencies. Today that level is nearer 15 per cent.

Indonesian domestic credit to the private sector is just 33 per cent, compared to 203 per cent in the US. The ratio is just 33 per cent in the Philippines too. It is even lower in Mexico, which may, by the way, benefit from re-shoring as manufacturers move closer to the US market.

As far as emerging markets are concerned, the markets are in panic mode. In such times they are lousy at picking the wheat from the chaff. When they become more rational, certain emerging market countries will see equities boom.

The last couple of days has seen news on the UK to delight all but the most cynical. Alas it has also seen news to make the cynical look smug, and say ‘I told you so’.

The good news relates to trade. Exports of goods in the second quarter of 2013 reached £78.4 billion, the highest on record. Okay, imports were up too, rising to £103.3 billion, the highest level since the three months to November 2011. But when it comes to records, ‘best ever’ would normally be seen to score the ‘best in 18 months’.

The UK’s deficit in goods and services in June was £1.5 billion, the lowest deficit since January.

But the real encouragement relates to exports outside the EU. In June exports of goods outside the EU rose, while imports fell. In fact exports to non-EU countries increased by £1.3 billion (10 per cent) to £14.2 billion and imports from non EU countries decreased by less than £0.1 billion (0.2 per cent) to £16.8 billion.

Within the EU, exports of goods also rose, but not by as much (£0.9 billion or2.3 per cent), while imports increased by £0.3 billion or 0.6 per cent to £52.9 billion.

In Q2, UK exports to the US rose by £348 billion while imports were £96 billion, and exports to China were up £153 billion while imports shrunk by £17 billion. The rise in UK exports to China seems to be part of a trend. They have risen sevenfold since 2002.

Don’t over-egg the trade data; it is good, but not brilliant. It is encouraging, however.

Less pleasing was data compiled by the House of Commons Library at the request of the Labour Party. It found that since 2010, of the 27 countries in the EU only three have seen real wages (that’s wages after inflation) fall so steeply. It turns out that UK wages, after inflation, have fallen by 5.5 per cent since 2010. Only in Portugal, Greece and Holland have wages relative to inflation fallen more than that.

Those two sets of data show the two sides of the UK economy at the moment. There are signs, albeit not overwhelming signs, of exports leading recovery. But as long as wage rises continue to lag behind inflation, the UK’s economy looks fragile. Much of the growth we are seeing is coming on the back of consumers spending more, which itself occurs because they are once again running up debts.

The fix lies with getting productivity up, and that surely depends on more investment. That is why George Osborne’s approach to creating growth via rising house prices is dangerous, but we don’t seem to have learnt from past lessons.

Not enough investment and rising house prices were characteristics of the UK economy before 2008. They are becoming characteristics again.

What do you want to do today? How about starting off with a nice coffee and at Harris + Hoole’s coffee shop, a bit of yoga, followed by some shopping at a trendy boutique followed by lunch at a Giraffe restaurant, and then off to the supermarket complete with a ‘Euphorium’ and something called the ‘Bakery Project’. If that all appeals to you, that might mean you would like a visit to Tesco’s new leisure and shopping destination in Watford. But here is some bad news for Chinese shoppers who fancy a similar experience in downtown Beijing. Tesco might be trying to do something big in the UK, but its plans are quite different in China. Is this the company’s opportunity to re-establish itself as an irrepressible force of nature, or is this Tesco giving up on the dream of creating a global super supermarket?

Around a year ago, research firm IGD waxed lyrical about Tesco. Of the world’s four largest retailers, (Tesco sits at number three in that list) IGD predicted the UK company was set to benefit the most from globalisation. It said: “Tesco’s international markets, particularly China, Turkey and India, will be a key element in driving their long-term growth and returns. The company will try to replicate its successful concepts in the UK, such as Express stores and Clubcard rewards scheme, in other countries.”

Well, the quest for world domination seems to be on hold. The company was probably right to pull out of the US. Its Fresh and Easy venture was like a black hole draining it of money. But the timing was awful. It moved into the US just as the world’s largest economy entered its worst recession since the 1930s. It exited just as the US economy appeared to be recovering. Maybe Tesco will be back, maybe it has learnt from its initial foray into the US, and will be back, but this time redoubtable. Maybe…

In China, Tesco has agreed to a joint venture with China Resource Enterprises. It has opted for a 20 per cent stake in the venture, throwing in its 130 stores, to form part of a 3,000 store empire. From a distance of several thousand miles it rather seems as Tesco has chosen to give-up on advancing its brand name; has given up promoting the Tesco business model worldwide, and has opted for a very logical and sensible joint venture rather than trying to create a truly global giant retailer.

As for Blighty, the problem faced by the company is that already has a massive share of the UK retail market. Maybe in creating a retail destination Tesco has chosen the only way it can expand in a market where it already has such a strong presence. Perhaps this approach can translate into other territories, and Tesco will be back in the US and via its partner in China, in the world’s second largest economy but this time as a pioneer of retail/leisure destinations.

But frankly it does rather look as if the dream of creating a global retail super heavyweight is over.

31 July 2013, and 1 August 2013: mark these dates in your diary. On these days economic news was revealed that meant one of two things; either the economy was well and truly on the mend, or we are seeing one very big blip. If it is the former, celebrate; if it is the latter enjoy it while it lasts.

They hadn’t expected much. Purchasing Managers’ Indices (PMIs) suggested the US economy had a rotten Q2. Sure, said the optimists, Q3 would be better, but the second quarter of this year was one we would rather forget. Then on 31July 2013 the hard data was released and it told a very different tale.

The US economy expanded at an annualised rate of 1.7 per cent in Q2, and by 1.4 per cent year on year. That was much better than expected, much better than the PMIs suggested.

Both business investment and residential investment helped – in the US when house prices go up so does construction, unlike in the UK where the correlation seems only very vague.

So that was the US. The news was good in the Eurozone too. The latest PMI from Markit on manufacturing in the region was out yesterday and it rose, hitting a two year high, with a reading of 50.3. To put that in perspective, any score over 50 is meant to correspond to growth. A reading of 50.3 is nothing special, but by recent standards it is positively wonderful.

And finally we turn to the UK. The latest PMI for UK manufacturing rose to 54.6, a 26 month high. And get this. According to Markit which compiles the data along with CIPS: “New export business rose at the fastest pace for two years, reflecting increased sales to Australia, China, the euro area, Kenya, Mexico, the Middle East, Nigeria, Russia and the US.”

Apologies for raining on such a pleasant parade, but the story was not good everywhere. In Russia and Turkey the PMIs fell sharply and look worrisome, in China the picture is mixed, with the official PMI pointing to a modest pick-up and the unofficial PMI from HSBC/Markit, which puts more weight on smaller companies, deteriorating.

Still with the PMIs, the news on Poland and the Czech Republic was much better. Watch these two countries closely, especially Poland. If there is truth in all this talk about reshoring, Poland, with its proximity to the developed part of Europe, may be a big beneficiary.

One worry is that other data out yesterday showed that Sweden contracted in Q2. The out and out bears – those who are cynical for a living – question the PMIs. They say they did not predict the slow-down in Sweden; they did not predict the pick-up in the US, and they are giving a misleading picture on Europe. The big fear relates to central bankers tightening policy as a result of this data. The Fed may accelerate its plans to ease back on QE.

As for the European Central Bank, it is cautious and conservative to a T. There is a permanent danger it will lose its nerve, and tighten again, sending the Eurozone back into recession.

If UK consumers open their wallets and purses and start spending in any significant way soon something is wrong. But there are reasons to think that exporters and investment may lead the UK forward. This is where we enter a danger period. A recovery built on correcting imbalances will be a good thing. But recovery built on consumer debt, as rising house prices encourage them to go out and buy, would be most worrisome and may even give credence to the prophets of doom.

The truth is that growth in UK wages has been lagging behind inflation since the beginning of 2010. Savings have been much higher too. In the second quarter of 2008, the UK was entering recession, but at that point economic forecasters had not woken up to this, and many were still forecasting a mild slow down. During this quarter the UK savings ratio was just 0.2 per cent.

This was surely evidence we had entered a time of madness. But a year later, the savings ratio had risen to 8.6 per cent. That was a staggering rise. UK households, scared by the prospect of falling house prices, had hit a big red button with the legend danger emblazoned on it. They saved more, and soon after, their wages fell.

So what do you get when consumers spend a lower proportion of their wages, while wages relative to inflation fall? Answer: a very severe dip in spending. No wonder the recession was so severe.

But the solution to this problem is surely not to encourage households to save less and borrow more. It is to try to get wages to rise, and for business and the government to use the money that households are saving to fund investment. At the same time, UK company profits are surging, and corporate cash sitting in deposit accounts at UK banks has hit 25 per cent of GDP, which is a 25 year high.

The UK can go one of two ways. The money that is not being spent, and is instead sloshing around the banking system, could be used to fund mortgages and in turn create a housing boom. Writing in the ‘Telegraph’ recently, Jeremy Warner said: “UK housing was not the cause of the financial crisis; in fact, UK mortgage lending has remained a haven of calm and safety for the banks throughout the storm.” See: Unbalanced and unsustainable – this is the wrong kind of growth

Maybe he is right, but isn’t that the problem. For too long, whatever money that is available has been used to fund mortgages, even buy-to-let mortgages because they are seen as safe, instead of funding entrepreneurs and wider investment because this is seen as risky. Even many would-be entrepreneurs have been seduced by the allure of easy and low risk money from buy-to-let, and have left the path of wealth creation and joined the path of re-shuffling wealth, which is all that buy-to-let achieves.

If the UK goes down the path of creating a housing boom, the causality may be true entrepreneurism and a boom based on debt rather than productivity. Alternatively, if savings were used instead to fund investment, the result would be truly exciting.

Despite George Osborne’s efforts to administer the first of the alternatives – the cheap and easy way to growth, election victory and an unsustainable economy in which falling government debt is paid for by rising household debt – there are signs that the second approach is occurring anyway.

The UK’s export recovery has been held back by the rather unfortunate fact that the Eurozone, our largest trading partner, is in the midst of an economic depression. But since 2002 exports to China have risen sevenfold. According to a report published by the ONS a few days ago: “In the latest three months the value of exports was 17 per cent higher than the average 2012 quarterly level. Import values from China were little changed, so the trade deficit with China, which had averaged £5.2 billion a quarter in 2012 shrank to £4.8 billion in the latest three months.”

Just as is the case in the US, there are also signs of manufacturing led recovery. UK car exports are beginning to outstrip imports. There is also anecdotal evidence of companies returning their manufacturing to the UK. As Capital Economics said: “The decline in offshoring has reflected a variety of factors. For a start, the trend towards more capital intensive production as technology improves means that the savings in labour costs that can be achieved by switching production to Asia have become a smaller component of total costs.

Western manufacturers are also increasingly specialising in high-tech sectors in which production cannot necessarily be replicated elsewhere. The strengthening of Asian currencies has also reduced the savings from offshoring. In addition, fast supply chains are increasingly valued, so that production can respond quickly to consumer tastes and inventory costs can be reduced. “

As for the UK, it said: “According to the manufacturers’ organisation EEF, the proportion of firms repatriating some output rose from 15 per cent in 2009 to 40 per cent last year.” It continued: “Low-value sectors such as textiles have been declining, while high-value markets such as pharmaceuticals and transport have been growing rapidly. The destination of UK manufacturing exports has also evolved. The share of goods exports going to the fast-growing BRIC economies increased from 5 per cent in 2007 to 8 per cent last year and has also persuaded some firms to produce domestically.”

There other reasons to be optimistic. Demographics are looking favourable. Population growth in the UK in this decade is likely to be at its fastest rate since the first decade of the 20th century. The shortage of homes to population is a problem, but there are signs this may be fixed as the government tries to reform planning laws. A house price bubble will do little for the UK in the long term, but a house building boom is different thing altogether, and this may happen.

North Sea oil output is on the rise again, and the shale gas revolution may or may not be a mixed blessing, but it should at least help to promote growth. And don’t forget that in a growing global economy the UK has certain innate advantages: its time zone being one. The UK working day overlaps with working days in both California and East Asia. The fact that English is spoken rather widely in the UK is another advantage. Add to that political stability and a strong legal system.

Yet, for all that optimism, something broken remains. The UK is not well disposed to encouraging risky investment. That may not sound like such a bad thing, but remember that risk is the key to innovation and growth in the long run.

The government can do more to help and it could start by using money created by the Bank of England via QE to directly fund investment into infrastructure and in entrepreneurs.